Download Impact of Dual-Use Goods and Technology - Econ

IMPACT OF DUAL-USE GOODS AND TECHNOLOGY
TRANSFERS ON NATIONAL SECURITY
A Thesis Submitted to
The Graduate School of International Studies
University of Denver
In Candidacy for the Degree of
Master of Arts
Brian Allen Hunt
April, 2000
TABLE OF CONTENTS
INTRODUCTION.................................................................................................................. 4
The Marriage of Economics and National Security............................................................ 5
1.0 Ideology and The Nature of the Political Economy ................................................. 7
1.1 Evolution of the International Market Economy ................................................... 7
1.2 Monetization of Economies: Implications for New Relations and Security ........... 9
1.3 The Age of Mercantilism ....................................................................................11
1.4 Liberalism out of Mercantilism............................................................................14
1.5 Criticism of Liberalism in a National Security Context ........................................15
1.6 Defense Industries in a Liberal Environment ......................................................16
1.7 Marxism: An Alternative Paradigm to Mercantilism and Liberalism ....................18
1.8 Marxism and Security ........................................................................................19
1.9 Which Theory Provides the Best Road Map? .....................................................19
2.1 Overview: Complex Relationships between Nation-States and Transnationals ..20
2.2 The Transnational vs. the “Competitive” Nation-state ........................................24
2.3 The Operations of Transnationals in an Anarchic System ..................................25
2.4 Increasing Military Capabilities through International Transactions in an
Interdependent Environment ..............................................................................30
2.5 Measuring Increased Military Potential from International Transactions .............31
2.6 Externalities in Trade and a Country’s Military Capabilities ................................34
2.7 “Dual-use” Technology Transfers and its Problems ...........................................35
2.8 Closing the Technology Gap: Large Country vs. Small Country .........................37
3.0 National Security and Technology Transfer: Strategic Dimension of East-West
Trade in the Cold War ...........................................................................................39
3.1 The Dynamic Benefits of East-West Trade to Soviet Economic/Military
Capabilities ........................................................................................................42
4.0 Export Controls, China & Hughes Electronics Corporation—National Security
Compromised? ......................................................................................................44
4.1 The Disutilty of the Current Export Control Regime............................................44
4.2 Assessment of the critical issues surrounding export controls............................47
4.3 The Futility of a Multilateral Export Control Regime ...........................................52
4.4 China and Hughes Electronics Corporation: National Security Compromised? ..54
4.5 Why “Dual-use” Transfers to China are Risky ....................................................55
4.6 A Look at China’s Defense Infrastructure ...........................................................59
4.7 China’s Ability to Assimilate Foreign Technology ...............................................61
4.8 China and Hughes Electronics Corporation .......................................................64
CONCLUSION: Containing Tech Transfers with out Compromising Economic Security ......67
REFERENCES....................................................................................................................72
INTRODUCTION
The end of the Cold War gave fresh impetus to reexamining the unique balance
between economic interests and national security interests of the nation-state. Today this
interrelationship of economic and national security interests is becoming dangerously
unbalanced in today’s international trade environment. Writing in a 1998 article, Michael
Hirsch pointed out the notion that every time a country engages in a commercial transaction,
a little bit of national security is traded off (p.3). This harks back to a time when the CIA
began counters worried over every uptick in Soviet technology, and when the U.S. defense
industry was sequestered by Pentagon top brass to spend billions and build new weapons.
Even for all its peril, the Cold War was in some ways a reassuring time. The enemy
and the choices faced by the United States were clear. Now, politicians argue that national
security is being “sacrificed at the altar of commerce” (Hirsch, p.2). Writing in 1941, Edward
Mead Earle argued that “in modern times…we have constantly been confronted with the
interrelation of commercial, financial, and industrial strength on the one hand, and political
and military strength on the other. This relationship is one of the most critical and absorbing
problems of statesmanship” (Kapstein, p.xiii).
This problem has gained new currency in light of recent proliferation issues
connected to commercial transactions in “dual-use” technology. On May 11, 1998, India
exploded several nuclear devices to be followed a few weeks later by Pakistan. Then came
the shocking allegations that two U.S. satellite companies, Loral Space & Communications
and Hughes Electronics, had violated U.S. export controls by helping Beijing improve its
missile guidance systems and the accuracy of its intercontinental ballistic missiles targeted
at the United States. In regards to Loral and Hughes’ recent satellite technology transferring
scheme to China, Republicans and Democrats view this form of commercial transaction with
China as compromising national security for the sake of profits and market share. This case
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(the Hughes Electronics case which will be looked at later) is a clear illustration of the
complex relationship between commerce and national security that has been exacerbated
by the deepening integration of the U.S. in the world economy.
The Marriage of Economics and National Security
Since the inter-war period it has been clear that the intersections of economics and
national security of a nation-state in a global economy are highly complex. Included in these
intersections of interests would be the following: rationalizing the impact of defense
spending on various sectors of the economy and employment, implications of
interdependence and globalization for economics and defense, weapons production and
procurement issues, defense mobilization, ensuring a defense industrial base with surge
capacity, exploiting “dual-use” technologies, joint research and development with allies and
past adversaries, defense burden sharing among allies, energy and raw material defense,
and acquisitions by foreigners of U.S. corporations that have defense business (Jordan,
p.292).
These intersections between economics and security become more apparent as the
operations
of
the
national
economies
interdependent in international trade.
become
more
complex
and
increasingly
Take for example the next generation of fighter
aircraft. The plane maybe designed in the United States, but the fuselage maybe made in
Britain and the computer components for radar made be made in Italy (Markusen, p.40).
But it does not stop there. Once the plane is in production, its assembly could be in South
America, Korea, Turkey, or the United States, as the F-16 is today, “with unique high tech
components from Germany, Israel, Japan and Russia and more cost-sensitive and
commercially available components from Brazil, South Africa, and Spain” (p.40).
The complexity of the integration of the U.S. into the world economy can be seen in
trade statistics as well. In 1996, 19% of U.S. Gross National Product (GNP) was exported
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and imported. Exports alone totaled about $615 billion. In Europe the numbers are higher:
22% for the United Kingdom and 31% for Germany (Jordan, p.292). The extent of this
interdependence was noticed first in 1986 when global trade topped the $4 trillion marked,
reached $6 trillion in 1989 and soared to $10 trillion in 1998 (Jordan, p.292).
In today’s global economy where trade policies have made nation-states more
competitive than ever for export markets, supply sources, capital, labor, and technology, the
behavior of transnational corporations is held loosely in check and defense experts argue
that national security interests have been compromised by this behavior. The nation-state’s
last protectionist tool of security---export controls---has been loosened to such a degree that
transnational corporations can act beyond the “arms length of the nation-state”, and
exchange “dual-use” goods (i.e. semiconductors, global positioning systems, etc), which
have a military application.
It is the purpose of this paper to examine how international trade and global
competitiveness has helped increase the influence of economic concerns at the expense of
military security. The claim is that in a post-Cold War era with declining defense spending,
U.S. defense industries that have become “civilian” have moved outside their home market
to meet the procurement demands of other national economies.
The result of these
commercial transactions in “duel-use” goods and weapons technology is the potential
increase in a trading partner’s productive and military capabilities that may erode future
relative gains in security for the U.S.
To examine this issue, part one of this paper will discuss from a historical
perspective the evolution of an interdependent market economy that has renewed the
debate of national security vs. free trade. Now the historical record itself is being
reexamined more for the insights it can provide regarding the nature, causes, and
consequences of economic interdependence. It is important to understand the structure of
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the environment in order to understand the behavior of the actors. Part two will look at the
specific possible interaction between international trade and a potential adversary’s military
strength. Important here is the welfare affect and technology diffusion gained by a state in
free trade that affects the country’ s economic and military development. Part three will
shed more light on this issue by examining trade and other economic issues of the Cold War
that affected different foreign policy and military outcomes. And finally, part four will discuss
the current investigation of Hughes Electronics Corporation’s China commercial satellite
transfer scheme, and the present export control regime that has strengthened economic
nationalism over liberalism. In this paper the terms nation-state and country will be used
interchangeably.
1.0 Ideology and The Nature of the Political Economy
1.1 Evolution of the International Market Economy
Political scientists of the realist school of thought, characterize the international
system as one of anarchy, by which there is an absence of central authority to hold the
behavior of sovereign states in check. Within this anarchic world, states must pursue the
twin goals of security and prosperity. Friedrich List defined this relationship well when he
argued that “national wealth is increased and secured by national power, as national power
is increased and secured by national wealth” (Kapstein, p.1)
Even if the pursuit of national wealth is part of a competition for power, doing so may
well require some degree of economic cooperation with other nation states. Robert Gilpin
argues that the consequence of this economic cooperation is one of the most distinctive
features of modern history, namely the emergence of a market economy for organizing
economic relations (Gilpin, p.20, 1977).
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The market economy, with it roots in seventeenth and eighteenth century Europe,
involves a place where goods and services are exchanged to increase the potential return to
the buyers and sellers. The outcome of the exchange itself is determined by the laws of
economics (supply and demand) and constitutes more or less its own autonomous sphere of
influence.
From its appearance, one may argue that a market economy being its own sphere
of influence divorces itself from the security needs of the state. However, the opposite is
true. The efficiency of the market system actually weds security with commerce as nation
states pursue wealth and power through interaction and cooperation with other nation
states. Yet, it is important to note here the drive for economic efficiency can act as a double
edge sword and compromise a nation state’s security. An example of this analogy would a
case in which the gains from commerce are not reflected in improved productivity or passed
along to make new improvements in the nation-state’s military and weapons. The balance
between commerce and defense is delicate and can become unbalanced if not prioritized
properly.
Theories on the balance between economic prowess and military strength date back
to Adam Smith’s Wealth of Nations. “Adam Smith---the first great theorist and proponent of
the market exchange system---recognized defense to be ‘of much more importance than
opulence’” (Gilpin, p.22, 1977).
The rationale for a market system is that it creates
economic efficiency and maximizes economic growth” (Gilpin, p.22, 1977). The objective of
economic activity is not to enhance security but enhance the powers of the consumer.
Defense was viewed as a public good and the responsibility of government and should not
be maintained by market forces. As such, Smith, liberals, and other neoclassicists tend to
de-emphasize the security and costs of a market economic system. Economic interaction is
viewed as a force for peace, however the costs of increasing this interdependence tends to
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disrupt societies core values and increase its vulnerabilities and sensitivities to outside
influences (Gilpin, p.22, 1977). For this system to work well hegemony and efficiency are
necessary.
This goes back to the statement made earlier that economic efficiency and security
must be balanced. In an anarchic system, without checks and balances between sovereign
entities, a hegemonic nation-state can offer the balance needed between the market system
its guides and the security interests of the actors involved. In this case, economic efficiency
provides mutual gains in security to all actors in a given system.
According to Gilpin,
hegemony without efficiency tends towards mobilized economies, thereby increasing
conflict. And efficiency without hegemony creates the free-rider problem in which other
societies take the gains of commercial interaction but not the costs.
Gilpin’s statement may sound confusing, but it points to the danger of how relative
gains in commerce upset balance-of-power arrangements in an anarchic system. This may
help to explain why under the Pax Americana era other economies were able to flourish
under an umbrella of U.S. security making it the longest peace maintained (with the
exceptions of localized military conflicts) in the post-World War II era.
1.2 Monetization of Economies: Implications for New Relations and Security
The Age of Exploration and the increased interaction between nation-states in the
“new economy” that came with it necessitated the monetization of the economy.
The
monetization of the economy has been a necessary precondition for the establishment of
efficient markets
The most obvious implication of a monetized economy is that it greatly extends the
geographical scope of the market, the range of goods and services provided, and creates
more efficiency (Gilpin, p.23, 1977).
Because of its efficiency, the market’s dynamic
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qualities attract an increasing number of buyers and sellers into its web of relations. The
motivation of the entrants is the desire to accumulate money, which can eventually be
exchanged for an even wider range of goods and services. Because of money’s efficiency,
other primitive forms of exchange (i.e. barter) are driven out and new relationships between
buyers and sellers are drawn in (Gilpin, p.23, 1977).
With the increasing number of entrants, new far-reaching implications for security
develop out of the new relationships between buyers and sellers. The advent of money
tends to dissolve traditional social relations and core values once protected by more
primitive forms of exchange. Max Weber argues that due to the lack of an adequate money
supply in European feudalism, the monetization of the economy led to its demise. Once
money is introduced into a society, there is the encouragement to accumulate wealth and
power domestically and internationally. This monetization of the market economy results in
the transformation of relations among groups and states.
This growth of the money supply from international trade between territories brought
about far reaching political and military implications. Monetization made possible the Military
Revolution in seventeenth century Europe (Gilpin, p.23, 1977). This period in history refers
to the rise of standing armies and their supporting national bureaucracies, all requiring large
amounts of money to finance its development. “The nature of war was transformed from a
clash of societies into an instrument of the national policies of emerging states” (Gilpin, p.23,
1977). National interests were defined as the protection of markets and the supply flows of
natural resources for the beginning developments of the modern military industrial complex.
As seen, the importance of money to states brought security and economics hand in hand.
A second important feature of the market economy was the rise of a middle class.
The ease with which this class achieved ascendancy in domestic and international society is
extraordinary. A key to the development of the middle class was the so-called
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Mediterranean commercial highway that passed through different cultural groups owning
different modes of production capabilities. This system encouraged the rise of commercial
centers in which the middle class had a high degree of independence and political influence.
Upon this base, money and trade became important for the financing of militaries to protect
territories and commercial centers.
“Although this alliance was rife with tension, the
recognition of middle class property rights were critical in the evolution of the nation-state
and mercantilist empires of the seventeenth and eighteenth centuries” (Gilpin, p.25, 1977).
These mercantilist empires constituted the developing interdependence of a market
economy on a global scale.
1.3 The Age of Mercantilism
Mercantilism, the economic doctrine most closely associated with defense
economics, dominated international thought in political economy during the seventeenth and
eighteenth centuries.
It was a system of power politics achieved by economic means.
Mercantilism was the first attempt to create an organized international market economy in an
anarchic system. Under mercantilism the economy was partially subordinate to the security
needs of the state. In an anarchic system a nation's military power was critical and could
only be maintained and financed by wealth and capital accumulation from international
exchange.
Since wealth and power went hand in hand, mercantilists perceived that the
accumulation of gold from abroad would be needed to finance future warfare. To achieve a
more than adequate flow of gold into the country’s coffers, mercantilists agreed that
balance-of-trade surpluses needed to be run. Thus by increasing trade, countries could
increase their wealth and consequently their security. For this extension of security to be
achieved countries would have to expand their economies through the expansion of their
territorial base in order to integrate new markets (Gilpin, p.32, 1987).
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An observation on the security of the state and need for overseas markets was best
expressed by Alexander Hamilton in his Report on Manufactures presented to the U.S.
Congress in 1791. Hamilton argued that “not only wealth but the independence and security
of a country appears to be materially connected with the prosperity of manufactures”
(Kapstein, p.2). Hamilton also argued that many of the “embarrassments” suffered by the
colonies in their struggles with England were due to their dependence on foreign suppliers
for defense material (Kapstein, p.2). This was the essence of mercantilism: survival in an
anarchic system in which the actors are faced with a “zero-sum” game and have to look to
themselves for their own survival. The “zero-sum” game is crucial in realist theory and
mercantilism. In the international economy, states jockey with one another to enhance their
relative prosperity that can one day be transformed into military power. As these states
enter into agreements with other states, they must concern themselves with the problem of
another state’s relative gains.
Even among allies in an anarchic environment, consideration of relative gains in
nation-state interactions never disappears, because the possibility of armed conflict between
allies never disappears (Mastanduno, p. 80). In a mercantilist/neo-mercantilist world, nationstates must calculate those allies today maybe adversaries tomorrow or in the next decade.
Therefore, hegemony is necessary in mercantilism to ensure that economic interactions do
not disproportionately benefit allies.
Even if the chances of armed conflict are remote, nation-states worry about the affect
economic interaction has on their political autonomy. A nation-state acquiring more of the
benefit from an economic transaction with its partners, may develop asymmetrical
interdependent relationships with them, which may result in political vulnerability, constraints
in decision-making, and even leverage over the behavior of their trading partners
(Mastanduno, p.80).
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Going
beyond
behavioral
affects,
nation-states
are
concerned about
the
consequences of their economic activities. This is to the extent that mutually beneficial
transactions may put a trading-partner’s firms at a competitive disadvantage leading to the
reduction in productive capacity of their industrial base, or far worse the movement of highvalue added activity away from a home territory (Mastanduno, p.80). This has become a
critical issue in defense economics as private defense firms relocate R&D and other
production operations abroad to improve their own competitive advantage. In an anarchic
environment nation-states are expected to pursue relative gains to keep allies and
adversaries in check, and forgo the benefits of cooperation and economic exchange in the
short-run, in order to have security in the long-run (Mastanduno, p.81).
In international trade, the liberal principles of comparative advantage do not just
occur through the market’s “invisible hand”. Relative gains become distributed unevenly.
Instead economic openness (a critical component of a market economy) is needed and only
arises in the presence of a hegemonic power. “In short, the theory of hegemonic stability
rests on two fundamental propositions: (1) order in world politics, created by one single
dominant power, and (2) the maintenance of order required by the continuance of
hegemony” (Kapstein, p.3). Through order in relations guided by a hegemon, the system
becomes less of a “zero-sum” game and more of a “positive-sum” game.
Scholars of hegemonic stability cite two examples in support of this proposition: the
Pax Britannica, which endured from the end of the Napoleonic Wars until 1914, and the Pax
Americana, which emerged in 1945. During both periods, international economic relations
were arguably a “positive-sum” game. The world economy was afforded protection by the
hegemon from all challengers. In this scenario, the ideals of liberalism were allowed to
flourish in trade and investment.
Over time however hegemons lose power.
This is
because other actors are “flourishing” at the expense of the hegemonic power (i.e. the free-
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rider problem). As a result, states begin to defect from the hegemonic system and system
fragmentation occurs. Conflict and war follow may soon follow.
To avoid this outcome, political realists/mercantilists see a powerful role for the state
in both national and international economies. Partial subordination of the economy to the
interests of the state is needed in order to achieve autonomy and superiority in defense.
Moreover, it is necessary in the international economy for the hegemon to maintain
cooperative commercial relations.
“In the absence of a hegemon, the realist sees the
distribution of economic gains no less than military powers as a “zero-sum” game”
(Kapstein, p.5).
1.4 Liberalism out of Mercantilism
Under the hegemony of Great Britain during the industrial revolution, a new type of
international economy was being organized, one that was based on specialization, free
trade, and an international division of labor. This new organization the economy became
known as liberalism.
Liberalism was no less concerned about the security of the state, but espoused a
hands off approach between bureaucracy and the market, and the international division of
labor was the most efficient means of creating prosperity, efficiency, and security (Kapstein,
p.5). The thinking of liberals was that as the state increased its prosperity domestically, the
burden of defense would weigh less on economic activity. Overall, economics was central
to military might.
Under liberalism it was hoped that as commercial and financial flows became more
global, economic incentives to engage in hostilities would be reduced, paving the way for a
peaceful world order. As Adam Smith states in his Wealth of Nations, trade would be a
peace-promoting device of statecraft.
Jean Jaques Rousseau put the argument for
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liberalism well when he said that economic interdependence creates bonds of mutual
interest and restraint which has an influence upon the struggle for power and advantage
among nation-states (Gilpin, p.30, 1977). Liberalism then offered a powerful alternative to
mercantilism as a way of achieving the nation-state’s most prominent goals: wealth and
security.
1.5 Criticism of Liberalism in a National Security Context
An important criticism of liberalism in a national security context was the possibility of
market failure. Adam Smith recognized the possibility of market failure, that is the market
could not provide the adequate resources for the preservation of national security. His
argument was that national security was not a product of economic activity and fell outside
the laissez-fair doctrine as a “public good”, a good that would not be provided by a
commercial sector. National defense thus fell upon the responsibility of the government
(Kapstein, p.5).
Mercantilists recognized this important insight into liberalism. For the mercantilist,
the preeminent problem facing every state in an anarchic society was security; political and
economic liberties were of secondary concern. Liberalism was a radical departure from
mercantilism since it viewed the relations in the international system as a “positive-sum”
game. Yet the necessary precondition for this envisioned environment was order by a
hegemonic power that provided the security to the international system so relations between
states would a “positive-sum” game.
Another important criticism of liberalism was the unequal distribution of relative gains
between countries as they interacted with one another in commerce. The gains from trade
in a liberal system were unequally distributed among the actors, which depended on the
relative size of a nation-state’s economy and its productive capacity.
This is because
factor-endowments of nation-states (land, labor, and capital) are proportioned unevenly
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regardless of product specialization, and technology levels of a country are more of an
endogenous variable than an exogenous variable. The security concern recognized in this
by economic nationalists/mercantilists was that industries had spill over affects
(externalities) throughout the economy brought on by the international division of labor and
other productive functions and would eventually lead to an increase in welfare of other
economies. This is well illustrated in trade between a large country (capital intensive) and
small country (labor intensive). In this case, the terms of trade are tilted more in favor of the
small country, which gains at the expense of the large country.
This is achieved by
importing capital intensive goods that can be used to improve in the long run the productive
efficiency of its economy relative to the large country’s economy. Therefore in mercantilist
thinking, “industry is prized” and should be protected “because it is the basis of military
power and central to national security in the modern world” (Gilpin, p.33, 1987).
1.6 Defense Industries in a Liberal Environment
With these concerns it is important here to briefly discuss the degree to which
liberalism has imbedded itself in today’s modern defense economy. Defense industries
since the 1980s have become increasingly global in the scope of their operations in order to
take advantage of the factor-endowments of another nation-state in order to make the
industry’s production more efficient or cost affective. Today, “foreign-sourcing of militaryrelated components has become widespread, while more military (and commercial) research
which is ‘“dual-use”’ in character, meaning that civil and military technologies is rapidly
becoming indistinguishable” (Kapstein, p.7).
According to Michael Hirsch, this indistinguishability between civil and military
technologies is the result of defense industries becoming more civilized against the
backdrop of reduced government spending on defense (p.3).
defense
technology-like
naval
propulsion,
— 16—
electronics,
Today much of the best
and
command-and-control
telecommunications are coming from the commercial sector. “Dual-use has become the
standard and not the exception. It just so happens that the defense industry is reconstituting
itself into a commercial oriented business that has defense customers outside its home
market. Part of America’s defense edge is dependent on its own commercial prowess,
which in turn depends on exports and a global leadership role.
In this case, banning
companies like Loral and Hughes from conducting satellite sales in China would probably
harm national security more than letting prize technology fall into the hands of military endusers in Beijing (Hirsch, p.3). However, this assumption is dangerous since it is assumed
that China does not have the capability to integrate such technology into its militaryindustrial base. In this case liberalism downplays the opportunity cost to defense in such
“dual-use” goods transactions.
Liberalism’s response to this attack is that economic nationalism/mercantilism create
conflictual, asymmetrical relationships between the capital-intensive countries in the center
of the system and the weaker labor-intensive countries on the periphery. Mercantilism itself
eventually led to interdependence through nation-states’ quests for new sources of raw
materials needed for state security.
Adam Smith pointed out that a liberal international economy could not develop
without the support of dominant economic states at the center (Gilpin, p.34, 1987). One
cannot happen without the other. Indeed one may argue that the international system is a
mixture of economic nationalism/mercantilism and liberalism. Which side of the spectrum
the system will fall to will depend upon how the present state system develops in the future.
Interdependence is simply a product of both. Which is given more weight (economics or
security) will determine which ideology will dominate.
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1.7 Marxism: An Alternative Paradigm to Mercantilism and Liberalism
With the end of the collapse of communism after the Cold War, it is tempting to argue
that Marxist/Leninism is only of historical interest. However it still provides a useful function
of explaining defense expenditure domestically and the global pursuit of wealth and power
internationally at a systems level.
Although the founders of Marxist thought—Karl Marx and Friedrich Engels—wrote
very little on international economics, they fully appreciated the political implications of the
development of an interdependent world economy. Contrary to liberal thought, which holds
interdependence as a means of peaceful relations, Marxism regarded it as a prelude to
world revolution.
For Marx and Engels the rise and spread of an interdependent world economy was
progressive and a step forward for humanity (Gilpin, p.43, 1977).
Capitalism was a
precondition for drawing the world into the market economy and setting the stage of a
proletarian revolution. Marx believed that the causes of underdevelopment of the states in
the periphery were from problems inherent in those societies, and western imperialism was
necessary to smash social and cultural conditions inhibiting economic development (Gilpin,
p.44, 1977).
The aftermath is a dominant capitalist world economy planting its own seeds of
destruction in that it diffuses technology and industry, and thereby undermines its own
position. As a result, peripheral states would develop their economies from this diffusion of
technology. “The intensification of the economic competition between the declining and
rising capitalist powers leads to economic conflicts and imperial rivalries” (Gilpin, p.45,
1977). Like the mercantilists, Marxism viewed the world system as also a “zero-sum” game.
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1.8 Marxism and Security
In terms of security issues, Marxists and Communists are violent revolutionaries
whom view the aggressive and imperialist nature of capitalism as the root cause of
insecurity in an interdependent world market. According to Marx, militarism is imbedded in
the nature of capitalism. “Capitalism pursues an internationally expansive logic as industrial
states accumulate surplus production, which is always more than what the ‘exploited’ worker
is able to buy. According to the Marxist accounts of history, by the late 1800s the growing
crisis caused by economic surplus led to intense competition among industrial states for
unexploited markets overseas” (Kapstein, p.8). This nature of capitalism is suspected to
have disrupted the balance of power system of the early twentieth century.
This suggests that Marxism view militarism and defense expenditure as inherent in
capitalist economies to thwart off the foreign competitors in the market periphery. As a
result economic relations among states become competitive (i.e. an arms race), conflictual,
exploitive, and “zero-sum”. Unlike like liberalism which views interdependence as a means
of peace among actors to restrain hostilities, Marxism sees it as a needed conflictual
arrangement that will in the end destroy itself and lead to the evolution of a “workers
paradise”.
1.9 Which Theory Provides the Best Road Map?
Among these ideologies the question before the policymakers is which one provides
the best road map to achieve a balance between economic efficiency and national security.
With the collapse of Communism, the two theories left to debate are economic nationalism
vs. economic liberalism.
Critics of liberalism argue that the market cannot ensure the military goals of
autonomy and superiority. It is an inherent fact that under comparative advantage (which
provides the market its efficiency) states must accept the conditions of dependence on
— 19—
foreign economies if they want a wider range of goods and services (Kapstein, p.10).
Although there is much truth in the economic nationalist/mercantilist/neo-mercantilist
perceptions, the problems of foreign dependence in liberalism may be alleviated by
searching for substitutes for defense related goods in the home market.
However, liberals do agree with neo-mercantilists that state intervention is necessary
to provide security. At the world market level, liberals see a hegemon as necessary to
provide collective security and economic stability so wealth and prosperity can flourish under
a liberal system.
This is so not to have a profound affect on a country’s defense
expenditures since the actor is improving its efficiency and power under the umbrella of
security provided by the hegemon.
The implication of these two views is that when confronted with a national security
issue, the policy maker should maybe first explore a liberal solution so as not further disrupt
the markets efficiency and the collective security of individuals.
“The official should
recognize that even within the defense economy, the principles of competition,
entrepreneurship, and free trade have a prominent place” (Kapstein, p.10). But as Adam
Smith argued, “defense is more important than opulence”. Unfortunately the marketplace
can not always be relied upon when it comes to the defense of the economy.
2.0 Behavior in the International Market and National Security
2.1 Overview: Complex Relationships between Nation-States and Transnationals
The interdependence between nation-states created by international trade produces
a complex array of linkages between national security and international relations. Trade
flows reflect the pursuit of domestic interests and goals interacting in a global environment
characterized by different levels of power and capabilities. For instance, U.S. support of
European integration and its willingness to withstand trade discrimination vis-à-vis Europe
— 20—
and Japan derived in large part from security concerns within the Cold War context (Meltzer,
p.200).
In a basic sense, gaining and preserving security hinges upon national power
capabilities, to achieve essential values. Stanley Hoffman noted:
“Today interdependence breaks all national eggs (power capabilities) into a
vast omelet. I don’t know where my power ends and yours begins, since my
power is partly your hostage and vice versa, and the more I try to force you to
depend on me the more I depend on you” (Meltzer, p.202).
What has created this “vast omelet” of interdependent power capabilities are the
structural changes in production patterns and exchange happening in today’s marketplace.
These changes include the rapid diffusion of technology and information, the increased
mobility of transnational corporations, and shortened time lags in cyclical trends and
production cycles among trading nations. Underlying these changes is the fundamental
dilemma facing every national government: the painful trade off between enjoying the
economic gains from involvement in international economic relations and preserving
national autonomy, security, and self-direction without disruptive external impacts (Meltzer,
p.207). Western nations are exporting ever-larger proportions of their GNP. New products
are emerging whose inputs may cross national borders through intra-firm trade numerous
times during the production process. And, production strategies today are shifting research,
development, and manufacturing processes around the world (National Academy of
Sciences, p.55). As a result the U.S. economy is very sensitive to policies that affect its
trade and changes in the market that create more vulnerabilities for it as it deepens its
integration into the world economy.
Of these changes, information diffusion and multi-market production strategies are
the most critical facets of today’s global economy that has deepened the integration of the
nation-state into the world economy.
It is the way that transnational corporations take
— 21—
advantage of these changes that has threatened U.S. hegemony in the world economy by
increasing vulnerabilities in security relationships making them more complex in an anarchic
system. These vulnerabilities in the international system create incentives for companies to
pursue such global production strategies as locating research, development, and
manufacturing facilities around the world as well as to enter joint ventures with foreign
companies.
The shift to global production has increased the roster size of companies
capable of producing high-technology products, with many of the emerging companies
coming up in the new industrialized economies of Southeast Asia (National Academy of
Science, p.55).
For instance, some of the top-line U.S. supercomputers of particular
importance to the country’s intelligence community are made in East Asia!
As can be
imagined, this situation has become a rising source of contention among U.S. defense
planners.
The increased availability of these products and the rapid diffusion of technology
make the effort to control the proliferation of sensitive technologies more difficult. One by
one, commercial uses are being found for military technology. For example, night vision
goggles, an important piece of military equipment covered under the munitions list at the
State Department, can now be found in the L.L. Bean catalog (Hirsch, p.6). GPS receivers,
once intended for guiding ballistic missiles, are now in reach of every backpacker and car
owner on the planet (p.6). The question is why the availability now? What has happened?
Recent administrations saw that in order for U.S. companies to be competitive abroad
export controls on high-tech goods needed to be relaxed.
The danger of this is the
increased level of trade with the transitional economies of China, Eastern Europe, and the
former Soviet Union, that want these products and the end user is not always known.
The above is a growing concern surrounding the intersection of the international
market place and security in the expanding commercial market for “dual-use” products, most
— 22—
of which embody advanced technology.
To compete successfully in this market and
maintain market share, U.S. firms are experiencing added pressures to export their most
technologically sensitive products (National Academy of Science, p.56). By the late 1970s
there were a number of “dual-use” technologies, such as advanced microelectronics,
introduced into the marketplace before they were found to have military applications
(National Academy of Science, p.56). The assumption is that if your economy is running
faster than the next one, then being ahead a few product life-cycles would more than
compensate any trade off with security that is attached to a “dual-use” transaction (Hirsch,
p.8)
Yet, trade in “dual-use” goods cannot take all the blame. New global production
processes alone are not creating security concerns so much as the increased reliance of the
U.S. on the world economy. The oil crisis of the 1970’s is a good illustration of how reliance
of nation-states in regard to access to critical natural resources opens more vulnerability.
The U.S. is the world’s largest importer of goods and services that make the country very
sensitive to changing trade policies of other nation-states.
The degree of increased
sensitivity correlates with the amount of overall trade the U.S. has with its trading partner.
For instance, a change in trade policy by Japan would have a higher degree of
sensitivity to aggregate U.S. economic concerns than a change in trade policy with say any
of the member states of Africa. As well, this degree of sensitivity varies from country to
country the U.S. trades with depending on the portfolio of imports and exports the U.S. has
with that country. Presently, we can see this sensitivity in the high price of oil imports from
OPEC nations. Complicating this issue of sensitivity are transnationals and their behavior in
regards to export controls of their home country. Many economists view the U.S. as
discouraging to exporting companies who have moved their production processes closer to
their target markets.
The relationship between transnationals and the nation-state is a
— 23—
critical issue when looking at the vulnerabilities created by deepened integration in the world
economy.
In a growing free trade environment along with the development of regional trading
blocs and other unions between nation-states, effective managed trade to supervise security
concerns has diminished. The nation-state is treated as a rational actor in an economic
system that seeks to maximize economic gains. Acting as a rational actor some political
analysts see the nation-state as retreating from its autonomy in order to pursue
expansionary policies to acquire new market share for its transnationals. This vulnerability
has been taken advantage of by transnational firms, which can operate beyond the control
of U.S. borders.
The transnational firm itself is viewed by many defense planners as generating new
vulnerabilities in international trade. Even being ahead a product life cycle or two just won’t
cut it. If so, one may argue that regulation of the transnationals’ behavior is needed for a
retrenchment of the nation-state
2.2 The Transnational vs. the “Competitive” Nation-state
At one time the governance of the international economy was synonymous with
government by nation-states as control was exerted over its sovereign territories.
Historically the state was the primary regulator of its national economic system (Dickens,
p.79).
Trade and investment in the world economy were literally “inter-national”. However
with the increased permeability of the nation-state to ebbs and flows in the world economy,
the state as a container is no longer.
As technology advances and information becomes more diffuse, nation-states as
containers are “leaking”. This is because today the nation-state has moved away from the
role as a regulator to a role as a competitor—behaving like firms—in the international
— 24—
economy.
According to Dickens, in an interdependent global economy, nations are
behaving like firms and compete with one another to attain economic goals and interests. In
a sense, states acting like firms have taken on roles as “competitive states”.
Dickens looks at Krugman’s work to point out that this shift in role to a “competitive
state” is dangerous and can help to explain the conflictual relationship between the
transnational and the nation-state. The concept of a competitive state according to Krugman
is elusive because nation-states are not like corporations (Dickens, p.87). Dickens quotes
Gordon on the conflictual relationship between transnationals and the nation-state:
“It is perhaps most useful…to view the relationship between transnationals
and governments as both cooperative and competing, both supportive and
conflictual. They operate in a fully dialectical relationship, locked into unified
but contradictory roles and positions, neither the one nor the other partner
clearly or completely able to dominate” (Dickens, p.243)
This quotation captures the essence of this conflictual relationship and when the
nation-state is viewed as a competitive body, this statement makes sense. Nation-states
would prefer that transnationals hold their allegiance to their home market. However, this is
not the case since transnationals not only span national boundaries but also incorporate
parts of other economies within their boundaries (Dickens, p.243). This relationship is a
major problem for states. The other problem is the rules by which transnationals operate.
2.3 The Operations of Transnationals in an Anarchic System
Transnationals pursue global strategies that offer the highest rate of return.
As
mentioned previously these include relocating research, development, and manufacturing
operations globally to minimize cost, maximize efficiency, and have closer proximity to their
target markets. Given the increasing complexity of technology and rising R&D costs, more
firms are globalizing their production processes. The cause for this is the increasing relative
cost of capital in the U.S. and the pressure on American management for results in the
short-term. American managers in advanced technology industries claim that the high costs
— 25—
of capital forces them to forgo investments with low yields, even if these investments are
critical to the long-term health of the company (Burton, p.128). The high cost of capital in
the U.S. makes it easier to understand recent transatlantic mergers among defense
industries. According to Markusen, defense contractors that merge can spread the costs of
capital, research, and development across a greater number of contracts in order yield
higher profit margins (p.42). In this case, more mergers mean fewer competitors, fewer
firms driving down bids on contracts and greater political clout at lower costs. The result will
be a “patchwork” of weapons specialization across the globe (p.47).
This monopolization of the defense industry through transatlantic mergers creates
new risks in technology transfers in “dual-use” goods transactions. The decline in weapons
producers in the market would shift the balance-of-power orientation in the arms market
away from governments towards big business (Markusen, p.47). For instance, any militarily
weak country that feels compelled to buy products and services from say Lockheed Martin
or Grumman, may also acquire weapons-producing capacity as a result of their purchase
(p.47).
This situation is making it pertinent for the home and host countries to monitor new
technological developments that will lower future R&D costs as well as regulate the
proliferation of new technologies and production processes from foreign locations (Patel,
p.146). “If transatlantic mergers occur on anything like the domestic mergers of the 1990s, a
few international firms my soon sell to a dozen or more international buyers” (Markusen,
p.47). Under such circumstances, with many buyers and few sellers in the arms market, no
government would be completely free to design weapons to its specific needs, enjoy clear
technological superiority, or regulate the diffusion or technology beyond its borders. The
U.S. and its allies would face global “private arsenals” – huge firms with a monopoly over
various weapons lines (p.47). Although the business interests of these firms is guided by
— 26—
the principles of profit-maximization and acquiring export markets, the risk which is going
unnoticed is that these firms have a high degree of autonomy outside national boundaries
which nation-states fear.
Dickens argues that the transnational would prefer to see the removal of allregulatory barriers and constraints. These firms seek the freedom to relocate when they
wish, the ability to export capital and profits from local operations, the freedom to operate
unhindered in a local market, and the freedom to export and import materials, components,
and services as they see fit.
Dickens quotes Picciotto on the ambivalent nature of
transnationals towards the nation-state:
“Transnationals have favored minimal international coordination while
strongly supporting the national state, since they can take advantage of
regulatory differences and loopholes…While Transnationals have pressed for
an adequate coordination of national regulation, they have generally resisted
the strengthening of international state structures…It is their ability to exploit
national differences, both politically and economically, that gives them their
competitive advantage” (Dickens, p.244)
According to this viewpoint, transnationals are an exploitive and distortive influence.
In regards to national security, a transnational may choose to license technology (or even
subvert the licensing process of a critical technology) that one day may have military
application. This ambivalent nature of transnationals toward security is a high politics issue
in regard to the globalization of the U.S. defense industrial base.
In 1990, the U.S.
Department of Defense reported that one-quarter of the technologies essential to American
industry (especially defense) was held by non-U.S. firms (Moran, p.80).
While fans of globalization see this as a great by-product of comparative advantage
in the international economy by bringing superior performance, innovation, and lower prices
for military and commercial purchasers, it dismisses the issues of vulnerabilities in supplyside economics and the location of production sites critical to the home industry.
— 27—
“A survey of post-World War II experience suggests that external domination of
technology, goods and services may well lead to persistent attempts at meddling,
manipulation, and harassment in the recipient’s sovereign affairs, even in peacetime among
allies” (Moran, p.80).
This interference has ranged from the U.S. denial of computer
technology to inhibit France’s insistence to re-export products that incorporate foreign inputs
to country’s such as China, Cuba, and a few Middle Eastern states; to the retroactive
cancellation of licensing agreements with European partners involved in the development of
a Soviet gas pipeline to Western Europe during the Cold War” (Moran, p.80). Since the U.S.
has historically been the manipulator, the concern overlooked is the process working in
reverse in a post-Cold War, multi-polar environment. To protect economic efficiency and to
prevent the “meddling process” from working in reverse, requires channeling narrow
protectionist interests into those industrial sectors in which foreign domination actually poses
a threat and not where the lack of collusion by firms and countries prevents exploitation
(Moran, p.81).
The operations of transnationals are linked to national security not only because they
have tended to cluster in industries that are critical for conventional warfare, but also
because they have come to occupy a commanding place in the external transactions of
many countries. In both Britain and the U.S., more than a quarter of the exports of
manufactured goods consists of transactions between parents of transnationals and their
affiliates. In the short-run this generation of foreign exchange by transnationals is critical to
the economic position of the nation-state in the global economy (Vernon, p.95). In the long
run, Vernon argues that nation-states are becoming increasingly vulnerable to intra-firm
operations between transnationals. Transactions between two affiliates of a transnational
enterprise located in separate geographic regions are less easily reached by the regulatory
— 28—
devices of national governments than transactions that are undertaken at arms length
between unrelated parties (Vernon, p.96).
This concern over lack of regulation is especially critical in the field of research and
development. In the 1980s more than half of the internationalization of R&D among U.S.
and European companies came from mergers and acquisitions with little government
interference (Patel, p.146). “Accordingly, nations that feel a sense of vulnerability to outside
forces as a result of a high-level of foreign transactions of this type have that feeling
heightened when the transactions are ‘internal’ to the multinational enterprise; and
heightened still further when the parent of the enterprise is located on foreign soil” (Vernon,
p.96). From a national security perspective, the question is whether or not given the nature
of the transnational and how it operates, does a nation-state increase its well being by
encouraging the establishment of these entities?
Vernon argues that given the lopsided relationship, the utility in national security
derived from transnationals is declining, and will further aggravate its relationship with the
state (Vernon, p.120).
His argument for the decline in this utility stems from that fact that
since nation-states are losing the ability to be affective containers and regulators in an
economy of “competitive states” they are in poorer positions to defend the interests of their
overseas enterprises. Given this fact, transnationals will adjust and further reduce the utility
of these entities as instruments of national security policy. Transnationals will continue to
pursue their natural bent---the creative business of moving ideas, money, people, and goods
in increasing volumes across international boundaries (Vernon, p.121).
As a result, the nation-state should retrench and find ways to hold transnationals
accountable for behavior that compromises national security. This concern should force both
government and industry to rethink their traditional roles in the development of technology
and application of technology. It stems from one overriding fact:
— 29—
“ When it comes to advanced technology, national security can no longer be
viewed in purely military terms; economic security is a vital consideration.
Moreover, just as it is increasingly difficult to make a meaningful policy
distinction between military and commercial technologies, so it is difficult to
determine how to manage international relationships, since important political
allies in military technology are often hard-nosed economic competitors in
commercial technology” (Burton, p.116).
2.4 Increasing Military Capabilities through International Transactions in an
Interdependent Environment
Inevitably, a transnational firm’s involvement in international trade has strategic and
security implications for the nation-state. As Adam Smith observed, international trade is the
route through which nations have achieved opulence---and opulence is necessary for
national defense (Schlessinger, p.135).
By participating in the international market to
exchange resources through trade, a nation may sharply rise its national income, thus
providing additional resources for its national power (Schlessinger, 135).
The strategic
implication of trade is that as the nation increases its wealth, it increases its productive
potential for war by enlarging its national product. Nations such as Great Britain and Japan,
who have limited supplies of natural resources, may not have risen to great power status if it
were not for the increase in their productivity through international trade.
A proportion of every nation-state’s economic capacity is devoted to maintaining and
improving its power status. During the Cold War the U.S. and the Soviet Union accounted
for 60% of the defense outlays of all countries (Knorr, p.184). Changes in a country’s
overall economic capacity will naturally affect their military potential. Today, the military
capabilities of the former Soviet Union have been severely weakened by the collapse of its
economic base, whereas the economic base of the U.S. has increased as a smaller
proportion of its GNP has been devoted to defense in the post-Cold War era.
In addition to economic capacity, the structure of a nation's economy is important in
judging its military capabilities.
Many countries can produce just about all the necessary
— 30—
things needed for the maintenance of its military. “Ever since warfare has become
industrialized, the level of industrial and technological development has been a major factor
in determining a country’s ability to produce sophisticated arms and its ability to service and
employ those arms efficiently” (Knorr, p.185).
The production of arms requires massive inputs of high-level resources (i.e. the
aerospace industry). “The importance of a country’s technological base has been further
elevated by the accelerating rate of weapons obsolescence. Survival in this competition
makes inordinate demands on precious resources available for Research and Development
(R&D) that yield a stream of improved designs and inventions that are in turn supported by a
rich infrastructure of scientific progress” (Knorr, p.186). A state that falls behind in this
scientific race courts technological dominance and surprise by other states. The pressure to
keep up drives the technological competition. This was dramatically illustrated in nuclear
weapons tests by India, quickly followed by Pakistan in 1998.
Because today’s modern weapon systems can only be produced in a small number
of countries, the military potential of all other countries would be “outclassed” were it not for
the international transfer of arms and inputs in international trade. For example China and
India have increased their capacity to produce nuclear weapons through the importation of
technological inputs from industrial states to build nuclear reactors (Knorr, p.187). New
studies on the impact of arms transfers and related technology on economic capacity, is
showing that industrialized countries gain no more efficient utilization of foreign military and
related technology than do developing countries (Li, p.486).
2.5 Measuring Increased Military Potential from International Transactions
One of the major efforts today in modern growth theory is to measure the impact of
technology on growth, or the relative change in a country’s total factor-productivity. Defense
economists are examining this shift in a country’s aggregate production function as a result
— 31—
of technological change from innovative activities (Li, p.487). It is found that on the lower
end (i.e. countries that have to import arms and related technology), the technological level
of the importing can be upgraded through the transfer. This occurs if the transfer leads to
an
improvement
in
human
capital,
new
infrastructure
construction,
and
the
adaptability/installation of the new technology in the civilian sector. If these criteria are met,
the aggregate production function of the country should reflect an efficiency change as well
as a technical change.
For this model to work, defense economists have broken away from neoclassical
theory by making technology an exogenous variable (Li, p.487). This shift in thinking is
required because neoclassical theory has provided little evidence that countries converge to
the same growth rate (Li, p.487). The argument in new trade theory is that economic growth
is disproportionate from country to country because trade flows are no longer static as
assumed in Ricardo’s comparative advantage model. They are however stochastic
(variable) because the transnational firm makes the factors of production (labor, capital, and
technology) very mobile as well as making trade and production flows follow economies of
scale.
The counter argument to these findings suggest that given the indistinguishability
between civilian and military technology, technology transfers through, say licensing
arrangements, may provide no benefit for the country’s aggregate production function. This
result occurs only if there is no adaptability between the technology and civilian sector and if
the new technology acquired diverts resources needed for growth away from the economy
(Li, p.487).
As technology diffuses through international trade and the R&D operations of
transnationals, it is far from clear if these less developed countries importing complex
weapon systems are capable of maintaining and employing these systems in the future. But
— 32—
as some Middle Eastern countries have demonstrated, these countries can learn to employ,
with considerable effectiveness, complex weapon systems capable of destroying aircraft,
tanks, and ships without any increase in economic capacity.
But although the international transfer of complex weapons systems has resulted in
the diffusion of military technology, dependency by these countries on the required inputs to
maintain them becomes part of a checks and balance system between nation-states
involved. In this case a large country can enforce export controls to prevent required
technological inputs from being transferred to another nation-state that has designs to
modernize its weapons systems. And this power relationship can be used coercively by the
exporting countries to influence political and economic behavior of the importing countries.
But if international trade is a vehicle through which a nation can increase its
productive capacity to improve its military capabilities, then it is necessary to see how a
nation’s military base can benefit through these private economic interactions. This is done
through R&D.
In U.S. trade policy there has been significant concern with promoting activities, such
as R&D by U.S. corporations overseas to lower operation costs, which may have valuable
spillover affects to other economies. This means that international trade is a vehicle for
technological advancement. Unlike the era of Smith and Ricardo who viewed the factors of
production as immobile, so that countries benefited from trade by their comparative
differences in these factors, trade today is dominated by the exchange of a country’s
particular strength in these factors.
“Trade seems to reflect arbitrary or temporary
advantages from economies of scale or shifting leads in close technological races”
(Krugman, p. 76, 1991).
With the increasingly important role technology plays in
international trade, it is important to examine the externalities created by trade which can
benefit a country’s military capabilities.
— 33—
2.6 Externalities in Trade and a Country’s Military Capabilities
In economics, the term externality means a “benefit from some activity that accrues
to other individuals or firms than those engaging in the activity” (Krugman, p.80, 1991).
Defense is an excellent example of a public good that exhibits externalities.
National
defense provided at the expense of the nation-state provides the positive externality of
security to society.
A clear illustration of this type of externality occurred during the Cold War, when
Europe and Japan flourished economically by diverting the resources it would need for
Communist containment towards their economic growth. This was possible thanks to an
U.S. umbrella of security provided to the free world. The externality created is positive if the
relationship between the provider and beneficiary is reciprocal. In our Cold War case, the
U.S. provided security to the free world in exchange for access to its allies’ markets to
exchange goods and services needed to maintain U.S. military preponderance.
From a security perspective an externality may be negative if the relative gains by
both parties is proportioned unevenly.
For this to happen, the spillover affect from a
transaction or provision, of say defense, increases the economic and military capacity of a
country vis-a-vie the supplier. A good example in economics is the diffusion of tech-knowhow generated in one area to other firms in other sectors.
For example, if China acquires the technical-know-how to improve satellite
technology through import licensing arrangements, the return on capital could be the
improvement of missile delivery systems that may threaten the stability of East and
Southeast Asia, as well as complicate security relations with the U.S. This security issue
becomes relevant if and only if China exhibits a relative increase in its total-factor
productivity affording the country an increase in technical and productive efficiency. The
— 34—
relevancy increases in regard to the discussion of “dual-use” technology transfer in
international transaction
2.7 “Dual-use” Technology Transfers and its Problems
In the post-Cold War era of declining defense expenditures, defense producers have
responded by the implementation of “dual-use” policies to offset the continuing growth in the
cost of capital and R&D, as well as to adapt to the ever changing relationship between
military and civilian technologies (Molas-Gallart, p. 367). Long lists can be compiled of
technologies developed for civilian uses that then later spread to military use, and viceversa. For instance, civilian aerospace technology has borrowed heavily from the defense
sector. Although the continuous growth of commercial markets has been able to sustain the
rapidly growing costs of R&D and capital investments, shortened-product cycles and stifling
defense expenditures have blunted the competitive edge of this commercial/defense
technology (Molas-Gallart, p.367).
It is being found that commercially sponsored R&D is supplying the most advanced
technologies to the military sectors of economies. Rather than the commercial sector being
subordinate to the military sector, the process has now been reversed.
Advanced
commercial technologies are now being applied to today’s most advanced weapons
systems (Molas-Gallart, p.368).
For the defense economist and defense planner, the
concern is the control of the transfer mechanism and negative externalities to security
created by them.
It is important here to redefine the concept of “dual-use” transfer. “Dual-use” transfer
refers to ways by which items used in one area can be adapted to another. Semiconductors
are a perfect example of a commercial technology later applied to military technology. The
importance of this issue could be seen during the U.S.-Japanese trade negotiations in the
— 35—
late 1980s over semiconductors.
At the time, Japan was the industrial leader in the
production of semiconductors, and the U.S. the major importer.
From an arms control outlook, “dual-use” technology has been seen as a problem for
the control of the proliferation of advanced weaponry. The problem for conflict in a liberal
trade environment arises when the availability of “dual-use” systems is confined to a limited
set of industrial countries, with the aim of making existing technology trade discriminatory to
all other countries (Molas-Gallart, p.369).
The result is conflict and attempts by other
countries to circumvent collective security arrangements provided to regulate the
proliferation of such advanced technology. In reality there is a diversity of civilian
technologies available to a larger set of countries, including developing countries, that can
be applied to military developments. The success of a “dual-use” transfer is dependent on
the ability of the country to adapt these technologies to its military sectors. According to
Malos-Gallart (p. 370) “dual-use” products can be:
1) Applicable to defense and civilian use without any need for modification (e.g.
steel). Companies that consider defense as one of their customers will often
manufacture these products.
2) Adapted for a use different from the one initially intended. Adaptation and further
development have been necessary for most products ‘spun-off’ from military
applications, like electronic computers, radar, numeric control machines,
transport containers, microwave ovens, etc.
3) Deliberately designed with more than one use in mind.
Molas-Gallart goes on to state that the mechanism through which to exploit “dualuse” products will depend on their position within the production process, and whether or not
they are fully-operational systems or sub systems to be sold to customer. Fortunately, many
final systems are not “dual-use” because they can not be adapted to carry out any other task
than the one intended to be carried out (p. 371). Although the final product itself may not be
“dual-use”, its components and subsystems maybe. “Any complex weapon system is bound
— 36—
to contain certain components which would be adapted to have another form other than
civilian use” (Molas-Gallart, p.371).
Military consumers and producers are keen to explore all possibilities of applying
civilian components and subsystems to defensive and offensive capabilities, for the purpose
to help control cost escalations. The type of transfer mechanism will determine the future
possibility of any adaptation. For instance certain products are not adaptable to the civilian
sector, given their special production requirements. Molas-Gallart notes:
“In the field of titanium, where the product is clearly a “dual-use” technology,
the production processes that have been developed in the military-aerospace
sectors are not suitable for other, civilian, high-volume applications. In a
neighboring sector, it has been pointed out that the same composite
materials are applicable to defense and commercial applications; however
some of the processes needed in the military sector (like surface
manufacturing for stealth capability) have no commercial application” (p.371).
Given the indistinguishability of civilian and military technology as it moves along the
transfer mechanisms of intra-firm trade, it is important to examine the production processes
of final systems and subsystems. This is necessary to determine if a traded product can be
adapted/improved without great amounts of resources needed to be added to make the
product altered from its initial use. It is important to see how trade of a “dual-use” product
can close the technological gap between countries in such a way that the economic/military
capabilities of the importing country are improved.
2.8 Closing the Technology Gap: Large Country vs. Small Country
Trade economist Paul Krugman acknowledges that technological innovation in
developed countries and the transfer of technology to less developed countries plays an
important role in determining the pattern of world trade and changes in trade patterns over
time (p.139, 1991). In Krugman’s model, the process of technological transfer in trade turns
new goods which developed countries export, into old goods which are public domain and
less developed countries can innovate from.
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He provides in an explanation for the shortened time lag in the international
production cycle that the number of new goods invented depends heavily on the number of
goods developed and available in the market (Krugman, p. 144, 1991). This is why the
proliferation of advanced technology is so critical, because it increases the probability of a
technological breakthrough by a competitor country.
In Krugman’s model, each good is innovated, developed, and exported by the North.
When the technology becomes available from the already existing goods in the marketplace,
the technology becomes available to the South. The result is a movement of industry to the
South. This has already occurred as many private defense firms have moved production
processes away from their home territory and provided more products in the world market.
Comparative advantage has shifted to the South as transnationals move their operations
there to take advantage of capital savings and lower wages that have not yet been affected
by the increase in technical change and efficiency. (Krugman, p. 145, 1991). The South
then gains in productivity by adapting the production processes of the transnational.
According to Krugman, it becomes immediately apparent that by increasing the
range of products and services, there is an increase in world productivity as the technology
becomes available to less developed countries. Following Li’s analysis, the relative totalfactor productivity of some of these countries will increase as production and R&D
processes move from the developed countries to these new territories to take advantage of
cost differences.
This will be reflected in an improvement of human capital, new
infrastructure and adaptability of new goods to the civilian or military sectors. Although
innovation may benefit the developed country, the technology transfer benefits the less
developed country as more and more products become available on the market.
The purpose of Krugman’s model is to be distinctively different from the traditional
Ricardian model of comparative advantage.
The model assumes a continuous process of
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technological change and progress that takes the form of new products and not obsolete
products manufactured by less developed countries. The danger is an increase in
vulnerability to the North by possible supply side shocks in critical components now being
produced in the South.
The relative gains from trade have now fostered conflictual relationships between the
North (importer of components) and the South (which now has improved it terms of trade
and leverage against the North). As a result, the South closes the “technology gap”. An
important asymmetrical relationship appears: “Technical progress in the most advanced
country always benefits the less advanced countries” (Krugman, p. 153, 1991).
As a result, the externalities created in international trade have made trade a “zerosum” game, which holds contrary to liberal views. This means that trade flows are guided by
the economies of scale (in search of capital savings and lower labor costs) that affect the
“strategic sectors” of the home economy.
And, because of the increased role of
technological competition, it becomes more plausible that certain sectors, such as “dualuse” technologies having no military application now but may so in the future, yield important
external economies that may benefit an adversary’s military capabilities.
3.0 National Security and Technology Transfer: Strategic Dimension of EastWest Trade in the Cold War
The relationship between technology and international relations is paradoxical: “It
has at once fostered interdependence and cooperation and sharply divided nations by
heightening national competition and global projection” (Bertsch, p.1). The transfer and
acquisition of advanced technologies through international trade were central ingredients in
the high-power politics of the Cold War. The purpose of this section is to organize the
security issues in international trade discussed so far. It should be evident from examples to
be given that through international trade, the Soviet Union was able to benefit from the
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diffusion of technology that in turn allowed the country to increase its economic/military
productive capacities.
The most difficult issue in U.S. foreign economic policy concerning the East-West
trade dimension had to do with trade in “dual-use” technologies.
As mentioned in the
previous section, this was the proposed sale of commercial goods that may have had a
significant military application. This was trade in a “gray area” of such goods as computers,
fiber optics, jet engines, semiconductors, and telecommunications equipment. In recent
years, decisions about which technologies to restrict centered around the tradeoffs between
national security risks, the economic benefits to the parties of the traded goods, and the
political affects of the proposed sale. Robert Klitgaard states that the policy problem in trade
of “dual-use” goods is “to structure and to manage the tradeoff between our benefits from
trade and the adverse implications” (Bertsch, p. 3).
It is clear from writings on trade theory, dating back to Adam Smith, that the
economic health of an economy is fundamental to its national security. During the Cold
War, many economic nationalists viewed East-West trade as making an inequitable
contribution to Soviet economic strength and military capabilities. The claim is that certain
trades in “dual-use” goods made a direct contribution to the Soviet military sector, and even
non-strategic industrial trades made important contributions to the development of Soviet
defense related industries.
“Even such non-military commerce as agriculture and grain
trade was sometimes seen as ‘resource freeing’, that is allowing the Soviet Union to free
resources for its military sector rather than forcing the country to invest elsewhere to solve
its economic and agricultural problems” (Bertcsh, p.21).
Important in trade with an adversary or competitor is that what may be beneficial to
the firm conducting the transaction, may not be good in the aggregate for the home country.
One of the major obstacles in trade policy with East Europe and Soviet Union, was the
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varying assessment of the need for trade with that part of the world. In the 1980s Germany
was the Eastern bloc’s largest trading partner, with some 6.2% of its total trade going to the
East (Bertsch, p. 22). During the Cold War, Western Europe and Japan valued their trade
with the East, and were always reluctant to join in any alliance policy that restricted this
activity. The U.S. saw such trade as having a “boomerang” affect on export competition with
domestic companies.
To recall Krugman’s trade model, as new products and the accompanying
technology become available in the market, less developed countries were able to benefit by
manufacturing these new products and re-exporting them at lower costs. An example of this
strategic concern in the East-West trade dimension was that prior to 1977 the Soviet Union
was not an exporter of ammonia.
But after signing and agreement with Occidental
Petroleum in 1978, the Soviet Union became the second largest exporter of U.S. ammonia.
“As result, the U.S. experienced several plant closures, declining ammonia prices, and
serious market disruption for domestic anhydrous ammonia” (Bertsch, p. 23).
The impact of the importation of advanced technology on Soviet economic and
military capacity received the most attention. Some have claimed that almost all of Soviet
technical achievements in The Cold War were attributed to Western, advanced technology
through legal acquisitions or covert means (Cooper, p.80). Prior to the 1990s, Soviet
reliance on Western technology was a decisive factor in alleviating or diverting an economic
crisis.
The proposed benefit of the importation of Western technology to the Soviet
economy was to achieve larger economies of scale that socialist development was not
capable of doing. But as Cooper points out, socialist systems are not sufficiently technically
dynamic as such to increase a country’s relative total-factor productivity to reap the benefits
of better efficiency from new infrastructure and improvements in human capital (p. 80).
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3.1 The Dynamic Benefits of East-West Trade to Soviet Economic/Military
Capabilities
Wolf argues that the importation of Western technology was critical to early Soviet
drives to industrialize (p. 35). In 1955, 1.6% and 5.6% percent of Soviet imports accounted
for Western machinery (p.35).
In 1976, imports of Western machinery and equipment
peaked at 41.4 % (Cooper, p. 87). In the same time period high-technology product imports
were 16.2% in 1970, 13.6% in 1975, 16.1% in 1977, and declining to 11.7% in 1980
(Cooper, p.89). In the same time period there was access to some restricted technologies
such as aerospace engines, nuclear reactor equipment, electronic components, ball
bearings, and X-ray equipment (Cooper, p.89).
Studies at the time concluded that the marginal product of this imported Western
machinery was fifteen times greater than indigenous Soviet machinery (Wolf, p.36). In 1982
according to the Central Intelligence Agency, legal acquisitions of western technology had
their greatest impact on the Soviet’s industrial base, and thus affected military technology on
a relatively long-term basis (p. 94). The CIA reported:
“The Soviet Kama Truck Plant, for example was built over seven years with
massive imports of more than $1.5 billion worth of U.S. and West European
automotive production equipment and technology. Large numbers of militaryspecification trucks produced at the plant in 1981 were being used by Soviet
forces in Afghanistan and by Soviet military units in Eastern Europe opposite
NATO forces. Similarly, large Soviet purchases of printed circuit board
technology and numerically controlled machine tools from the West already
benefited military manufacturing sectors” (CIA, p.95).
In 1983, the CIA also concluded that legal acquisitions of know-how and technical
components that are “dual-use” and applicable to the microelectronics field enabled the
Soviets to meet 100% of the microelectronic needs for military purposes (Holloway, p.179).
Another most notable incident of the impact of the trade of “dual-use” goods by
transnationals with an adversary occurred in 1972 with the U.S. approval of the sale of 168
precision grinding machines, manufactured by the Bryant Grinder Corporation, to the Soviet
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Union (Holloway, p.181). The CIA insisted that these machines made it possible for the
Soviet Union to produce the micro-ballbearings needed for functioning gyroscopes and
accelerometers in missile guidance systems, and without them the missile accuracy of their
country could not have been so markedly improved (Holloway, p.181).
A counter study, to the satisfaction of security specialists, showed that given the
resource demanding nature of Western capital investments, importing such technology
appeared to be less attractive than at first glance. Wolf cites Japan as a similar example of
the Soviets inability to incorporate Western capital investments into its economy and
infrastructure (p. 36). The opportunity costs to the Soviet Union would have been significant
to the extent that the best resources would be need to be transferred from other projects to
make the capital investments operational.
This Soviet case exemplifies back to Li’s analysis of how total-factor productivity
varies from country to country when importing the same technology. But in a large countrysmall country trade case, the Soviet Union (being the smaller country economically) gained
more dynamically than the U.S. in importation of advanced technology. However, Wolf
argues that the dynamic gains to the Soviets derived more from hard-currency borrowing
from Western European creditors to finance its imports of western technology (p.37).
Regardless of the debate then and today, it is widely agreed that the U.S., in pursuit
of maintaining détente took advantage of growing East-West trade for foreign policy
leverage when it came to security.
Political considerations and tolerating trade
discrimination visa-a-vie Western Europe and Japan proved that economic preponderance
was more central than security. It was believed that the current export control system would
monitor relative gains acquired by the Soviets in international trade transactions.
It is now being realized that there are more products on the open market that are
“dual-use” (e.g. ballbearings in gyroscopes that allowed for improved Soviet missile
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accuracy) and not affected by export controls. The danger is that export control policy is
handled on a case by case basis, after the fact, when a corporation licenses or sells goods
and technology that may have future military applications.
4.0 Export Controls, China & Hughes Electronics Corporation—National
Security Compromised?
4.1 The Disutilty of the Current Export Control Regime
Export controls on “dual-use” goods are an instrument of national security for the
regulation of transnationals’ behavior. As nation-states act more competitively, this control
system has been loosened.
Against the backdrop of Vernon’s earlier argument, the
transnational enterprise has lost its utility as a national security instrument since the goal of
the entity is to exploit “loopholes” that will further its own economic interests.
The trends leading to this compromise began against the backdrop of declining
defense spending at the end of the Cold War, former adversaries no longer being perceived
as threats, and deeper integration of the U.S. into the global economy. As the 1990s began,
well-defined geopolitical and technological trends increased pressure on the U.S. to narrow
or eliminate export controls in East-West trade. Senator John Heinz reported the following
trends in 1991:
1) Decreasing geopolitical tensions in Europe and pressure on the U.S. to remove
or relax current trade restrictions to the Soviet bloc, particularly Poland and
Hungary.
2) A decreasing if not vanishing view of China as a threat to national security and
pressure on the U.S. to prescribe China to a shorter export control list.
3) Increasing domestic pressure on the U.S. to eliminate or narrow export controls
West-West, which accounted for 80 percent of U.S. trade.
4) Increasing pressure to redirect the export control regime towards the Third World
to prevent the proliferation of weapons of mass destruction.
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5) Increasing globalization, commoditization, and foreign availability of technologies
outside the Western Alliance, a trend noted to be a leading decline of exports
and loss of technology leadership by U.S. industry (Heinz, p.3)
Since the passing of the Export Control Act of 1949, export controls have been an
integral part of U.S. foreign economic policy used for purposes of persuasion, reward, or
punishment in order to influence the internal politics or foreign actions of another state. The
purpose of export controls was to restrict scarce resources and technology that would
contribute to increasing the military capability of a real or potential enemy (Heinz, p.3).
However against the backdrop of a competitive state in a globalized and commoditized
economy such controls are viewed as restrictive and creating a negative externality in the
nation-state’s overall economic welfare.
Relaxation of these controls was viewed against the negative consequences of
declining exports in high technology and “dual-use” goods in the late 1980s. The U.S.
export control regime is by far the most restrictive in the world. Against the backdrop of the
Cold War, these restrictive measures on international trade of certain goods would appear to
put the U.S. at an economic disadvantage.
Such restrictions affect export oriented
companies and force upon them a global production strategy to relocate R&D and
manufacturing closer to target markets around the world.
Data on U.S. export levels in high technology goods is compelling to explain this
transition. High technology accounts for over 45 percent of manufactured exports in the
world. In 1986, the U.S. registered its first trade deficit in high technology of $2.5 billion
(Heinz, p.113). Between 1983 and 1984, high-tech trade for the U.S. decreased by some
$18.7 billion.
During these years the defense industry argued that restrictive trade controls
had led to an imbalance between arms cooperation and technology transfer policies.
According to industry insiders, the U.S. would benefit by a shift from a unilateral export
control system to a multilateral system.
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The National Academy of Science argues that the negative reception of the
international business environment to export controls has been a big factor in the loosening
of these safeguards by the U.S. According to a report in 1986, 52 percent of U.S. business
lost sales to foreign customers as a consequence of export controls. In more than 212
separate instances, business deals were turned down by advanced industrialized nations
with U.S. companies because of controls. Additionally, 38 percent of U.S. firms had
overseas customers wishing to shift to non-U.S. sources of supply to avoid entanglements
with U.S. export controls. This information suggests that this independent variable had a
significant relationship on the U.S. trade deficit in “dual-use” goods.
Although the goal of the administration has been to regain export competitiveness in
“dual-use” goods by having firms operate under less stringent controls, the period of relative
peace with our former Cold War adversaries has led the U.S. to forget the purpose of these
controls: to restrict technology transfer that will increase the economic-military capabilities of
a foreign power visa-vise the U.S.
Trade economists would argue that export controls are a form of strategic trade
policy to protect industries that are highly vulnerable to shortened international production
cycles. At the same time this forces foreign firms abroad to pay higher prices for
technological inputs and information as well to increase their reliance on the technological
prowess of the U.S. The international environment has changed in such a way that this
argument makes sense. The controls themselves are a “necessary evil” in free trade that
will neither be perfect or permanent. Their purpose is to protect U.S. overseas markets in
high technology.
There are new factors in the international environment that Heinz did not take into
account:
1) There is greater scientific and technological parity between industrialized nations.
— 46—
2) There has been the emergence of new major exporters in the past decade;
especially among the new industrialized economies of Southeast Asia that are
vying for the same global markets and have a high degree of import penetration
in the U.S.
3) And, as mentioned previously, transnational corporations are being held less
accountable for their operations in host economies, compromising national
security interests.
Defense planners argue that these controls are needed to help prevent the rapid
erosion of the technological advantage we have left. The dilemma facing the nation-state in
a growing free/managed trade environment is how to prevent these necessary controls from
interfering unnecessarily with commercial trade and development.
4.2 Assessment of the critical issues surrounding export controls
National security export control policy should be the result of a process that weighs
the benefits of controls in relation to potential adversaries against the costs in terms of the
domestic economy and relations with allies and friendly trading partners (National Academy
of Science, p.8). In terms of making correct policy decisions regarding these controls are
that their costs are hard to measure because they “derive from the web of competitive and
cooperative relationships among western countries” (National Academy of Science, p.9). In
terms of these costs, the principle concern has been on future sales and market share in
international trade.
For example, reduced revenue from lost sales and market share may translate into
less investment, a lower overall growth rate in the member economies, reduced innovation
and friction in relations among trading partners. For instance, the short-run loss attributable
to export controls in 1986 was about 10 percent of total U.S. exports.
The adverse
competitive affects of export controls can be alleviated according to economists by the
establishment of common controls in “dual-use” technology, a control system that does not
exist at the moment.
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The bearing question is what is the appropriate point at which the nation-state can
interfere with technology transfers without damaging international economic relations and
giving cause to transnationals to relocate abroad and forcing a compromise in national
security priorities? There are two perspectives that can be looked at. The first interference
point would be where the economic costs of export controls to U.S. firms over a period of
time, resulting in a slower growth rate of a nation’s economy, has future negative
repercussions on the compensations in national security derived from the controls. In 1986,
the National Academy of Science calculated that the annual direct costs to U.S. exporting
from the interference of controls would be $9 billion annually, associated with an annual
reduction of employment of 200,000 in the export manufacturing sector of the economy
(National Academy of Science, p.121). In addition, the application of a standard economic
multiplier for the total reduction in the 1985 U.S. GNP forecasted a reduction in investment,
research, and development of approximately $17 billion. The majority of these leakages
have been reported with Western Europe and Japan.
These losses are expected to
increase with competition from the trading blocs of Southeast Asia and Latin America. The
second perspective is of course opposite of the first. Interference would occur at that point
where the compromised costs of future national security is compromised by the economic
gains of firms through technology transfers and trade of “dual-use” goods in diversions and
legal sales.
It is worth noting that diversions are hard to detect. They can occur at any point in
the export process: It includes fraud in pre-license or post-license documentation, theft
during transshipment, and unauthorized post-shipment.
A number of potential foreign
adversaries have sophisticated multinational diversion mechanisms that make the sales look
legal and escape counterintelligence detection.
— 48—
Identifying diversions is especially
problematic while goods are in transit through the bonded or custom free zones maintained
in most countries.
In July 1986, the U.S. government uncovered a diversion of a large shipment of
computers and related sensitive equipment in the tens of millions of dollars. The equipment
which was believed to have been destined for the Soviet Union had first been routed to
Belgium and then to a Turkish buyer in Austria. A second instance involved Richard Mueller,
a Western German citizen, whom had an established network of over 75 “dummy” and
“front” firms in Western Europe to purchase products and technology to be destined for the
Soviet Union and other foreign adversaries.
So how should the interfering point of the nation-state be handled to prevent such
diversions, when nation-states are behaving more like firms in the global economy?
Because sources of products and technology exist elsewhere in the world, and because
most diversions involve activities in other Western nations, the current U.S. export control
effort, some argue, must be multinational.
The environments for a multinational export control regime maybe very receptive
given the emergence of trading blocs and other multilateral trade arrangements. With the
strong push towards greater free trade and increasing debate around how to hold
transnational firms accountable for behavior that affect nation-states, a multilateral effort
may be affective if the a strong base of enforcement mechanism is held in place.
Such a multilateral effort would need to involve a transnational defense-industrial
policy (Markusen, p.48). Given the described behavior of transnationals and the trend in
transatlantic mergers and acquisitions by U.S. and European defense contractors, nationstates would be in a better position through such a multilateral defense-industrial policy that
would help keep these companies in check.
This would involve an internationally
coordinated strategy that would assess the defense needs of each partner country, chart an
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efficient economic course for meeting those needs, and restrain arms proliferation.
A
transnational defense-industrial policy would build on established arrangements between
countries and “mirror the commitments with a transparent system that documents, guides,
and rightsizes the industry to achieve efficiency, preserve a modicum of competition, and
keep the lid on arms proliferation” (p.49). From its appearance, a transnational industrialdefense policy is analogous to “new wine in old bottles”. Yet, since there are trade-offs
between economics and security, this type of policy would help prevent a nation-state from
“cutting off is nose in despise of its face” economically; as well help ensure the balance-ofpower orientation in the arms market is still tilted in the favor of governments and not begin
business. So how would such a policy be done? This would begin with three progressive
steps: knowledge sharing, coordinated defense-industrial base management, and ultimately
joint procurement (p. 49).
In the first steps, nation-states involved would need to create a common knowledge
base about their defense industries, including efficiency analyses of plant and design team
size, ongoing evaluation of excess capacity, and profiles of the technical and business
strengths and weaknesses of major contractor (p. 49). The first step does not mean for a
nation-state to “give away the farm” on its military and weapons capabilities, but establishing
a base of knowledge would help prevent future arms races that result from the guessing
games about the military strength of one’s adversary.
And amazingly enough the
information is publicly out there. By comparison to other countries, the information publicly
available in the United States on it defense contractors, includes data on distribution of
defense contracts by firm, region, and industry, as well as the dependency of individual
industries and occupations on defense dollars. This type of information shared would be
crucial in helping advise nation-states on defense spending and military/civilian industries
integration programs.
— 50—
Once a base of public knowledge has been established between partner countries,
then the second step, market coordination in the arms market, can take place. For this to
happen would require a new multilateral organization to distinguish between desirable and
undesirable partnerships between transnationals (p. 49). This second step is where
economics and security can be helped to stay in balance. This new body would review
proposed transnational mergers between industries, and ensure that no merger or
acquisition would endanger security, hamper competition, or concentrate to much economic
and political clout with one firm (p.49). Following an approved merger, this body would
identify where overlapping operations were, shut them down, and then institute alternative
development strategies to assist regions facing the sharp end of defense conversion. This
type of market coordination would in way help regulate military/commercial integration of
enterprises, as well as help reduce the risk of one company or region having the relative
design and production advantage of important components and sub-components in a
weapons system. According to Markusen, The EU’s KONVER program, which finances and
advises planning on future European base and shipyard program has shown that such a
market coordination model does work (p.49).
Finally, in the third step, governments would engage in joint-procurement programs.
In this case, domestic and international firms would engage in competition for weapons
contracts. This would not only help create a fairer market, but it helps ensure that the
balance-of-power in the arms market stays in favor of government and not business.
The
present Joint Strike Fighter program is an example of this type of collaboration. Instead of
allowing government and firms negotiating deals over contracts in secret, joint-procurement
would help negotiate an open and fair division of labor among competing countries.
It would be foolish to think that transnational industrial-base policies are easy to
develop. There are legitimate obstacles such as the unwillingness to sacrifice sovereignty
— 51—
and the potential costs to employment when defense conversions take place. As well, very
few or even no states would bother to engage in the knowledge sharing of their military
industrial base. But the obstacles can be reduced through already established cooperative,
bilateral arrangements. In a relatively peaceful security environment, fiscal austerity and a
troubled world economy, should propel countries to engage in such a policy. Doing so
would be especially pertinent given the compromise to export-controls by a globalized
defense industry.
4.3 The Futility of a Multilateral Export Control Regime
It is agreed that with increased global interdependence, one country’s relative
capabilities often depend on the external actors and events. This has been heightened
more as nation-states assume the roles of “competitive states” rather than regulators and as
transnationals alter their global production strategies to take advantage of the structure of
the current export control systems of nation-states. With emerging trade blocs and the
removal of trade barriers, accompanying this should be a goal of collective economic
security among the member participants.
The optimist perspective of a multilateral export control arrangement is to foster joint
gains, rather than have unilateral efforts to seek individual gains, since these efforts are
often met with retaliation by trading partners and eventual joint loss (Meltzer, p.202).
According to Meltzer, what are needed for this to work are assessment, regulations, the
provision of equity among member states, and the concept of emergency relief.
Assessment is simple in that it allows members of an arrangement to collect and
evaluate information on perceived threats to collective economic security. Such a task can
play a vital role in mitigating crisis conditions and instituting “early warning systems”
designed to activate multilateral remedies. The most recent financial crisis in Asia reopened
this discussion on the effectiveness of institutions such as the World Bank and the IMF
— 52—
regarding the effectiveness of their economic surveillance activities in critical countries.
When these crises erupt, the chance for conflict increases.
Regulation is the second important priority.
The establishment of internationally
accepted rules governing behavior is especially critical. Many issues such as scarcity of
supply and export control concerns have arisen, and GATT codes and the most recent WTO
have provided little regulatory guidance in these matters.
The third priority is equity. This task relates to the insurance of joint gains and fair
distributive efforts of affects among member states.
This is especially important to
developing economies that are being integrated at an uncontrollable rate into the
international market place. The problem of accommodating economic welfare is difficult
because it has both international and intranational dimensions that must be dealt with. This
is a critical issue in technology transfer as Western states want to control the flow of
technology and information to less developed economies which have the potential to erode
the competitive advantage of Western states in certain product sectors such as
microelectronics and telecommunications. This becomes more apparent as transnationals
relocate research and development to these markets.
The final priority is international emergency relief.
This will add the capacity to
extend multilateral relief for short-term, severe difficulties is essential to avoid responses to
trade problems that would lead to joint losses among other members.
For instance in
commodity trade, price and supply conditions are subject to manmade and natural
disruptions that can create acute crises.
Relief provisions would alleviate deprivations
threatening a collapse in collective economic security.
Put together, are these provisions enough to create an enforceable multilateral
export regime?
The important factors to look at would be the increasing cost of this
interdependence and the systems ability to be a deterrent to transnational firms’ behavior.
— 53—
Meltzer argues that collective economic security arrangements come with such high
interdependence costs that nation-states are less willing to engage fully into them. Broadly
these costs entail the acceptance of circumscribed options or loss of autonomy by national
governments, often leading to increased exposure to disruptions caused by external
economic activity. In addition, there are often significant costs that stem from these
collaborative agreements such as acceptance of smaller market shares for exports or
devoting specified resources for the maintenance of supplies of scarce resources. Nationstates tend to see the maintenance of short-term positions in a problematic arena as far
better than giving up for instance market share for increased collective security.
The second problem is the pressure by transnational firms on its host economies to
not partake in these arrangements. Transnationals have different priorities than nationstates and would view these arrangements as impeding their freedoms of mobility and
exporting. It is obvious that no such international body or even multilateral export control
regime could regulate the behavior of a transnational. During the Cold War, transnationals
got around multilateral export control agreements between the U.S. and CoCom members
by exporting through countries not involved in these arrangements.
The idea of a
multilateral export control regime is by far best only optimistic and lacking in realist notions,
especially since the Cold War, economic advantage is more central than military advantage.
Yet, if nations can move beyond their short-term relative gains and look long-term,
engagement in such multilateral initiatives would find to have mutual economic and security
gains.
4.4 China and Hughes Electronics Corporation: National Security Compromised?
It is most appropriate for this paper to identify a current case in international security
discourse that brings together the theoretical issues discussed so far. In 1999, Hughes
Electronics Corporation was attacked for compromising national security for its own
— 54—
economic gain and goal of servicing a greater market share in China. Through an
unauthorized licensing arrangement with China, Hughes transferred civilian satellite
technology and know-how that defense experts and independent agencies argue has
increased China’s missile accuracy in its nuclear weapons program.
This charge has shaken up the efficacy of the U.S. export-control system and
painted a picture of lost autonomy to transnational firms. Declining U.S. economic and
military preponderance in a post-Cold War multi-polar system is seen as costly in a freetrade environment. And new trade theory has implied that the behavior of transnationals in
the trade of “dual-use” goods has created negative externalities in national security.
Before examining the “nuts and bolts” of the Hughes/Chinese transaction, it is greatly
needed to examine why the U.S. views this transaction with China as enhancing its own
“insecurity” with its communist partner.
4.5 Why “Dual-use” Transfers to China are Risky
Before détente, the U.S. viewed China as enemy number one.
This view was
predominant among Washington policy-makers that viewed China as having the willingness
to use conventional (as well as nuclear force) to export its Communist revolution around the
world. Mao Tse-Tung once remarked that “political power comes from the barrel of a gun”
(Jane’s Intelligence Review, p.42). To achieve this aim, the Chinese realized that a
concerted effort would need to be made to improve the quality and inventory of the People’s
Liberation Army (PLA). To do this required to embark on a two-tier modernization program
that combined the development of indigenous technology through the acquisition of foreign
technology from abroad through legal and clandestine means (p. 42). Of its modernization
programs, the nuclear weapons program is the most important.
— 55—
This policy and thinking reflects the risk to U.S security in trading “dual-use” goods
with potential military application with China. Foreign technology acquisition has always
figured prominently in Chinese relations with the industrialized world since the late 1970s.
Allegations today concerning satellite exports and nuclear espionage demonstrate the
centrality of high technology to the debate about China’s place in the world. This makes it
important to policy makers to explore the links that may bind China’s national technology
and industrial policies to security and development. Feigenbaum notes that since 1987,
strategic technology programs has comprised the largest source of direct central
government finance for R&D in priority areas such as space, lasers, and supercomputing (p.
100).
The lion’s share of Chinese technology imports and exchanges are in industries and
fields which can ultimately improve this nuclear power’s military capabilities. Steadily in the
last two decades China has “stepped up” the activity of its imports in electronics, computers,
and aircraft technology. This may simply state that such activity reflects the fact that China
wants technology that is in the broadest term “dual-use” (Frieman, p.1).
The first task before assessing whether or not a “dual-use” good acquired by China
has U.S. security implications, is to determine who receives the good purchased. The record
on the end users of “dual-use” goods in China is rather sketchy. “Chinese trade magazines,
for example report sales of foreign technology to China, yet do not provide the correct name
of the Chinese end user, the dollar amount of the transaction or the exact name of the
supplier” (Frieman, p.4). Information on the sale of certain equipment to China is often too
vague to know whether or not the item could easily be used for military application. Take for
example another controversial export case in 1995 involving the sale of state-of-the-art
machine tool equipment to China that was diverted later to use by a military plant (Hirsch,
p.6). Problematic is that the U.S. Census Bureau keeps record of dollar amounts of
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equipment sold to China, but not according to product categories that correlate with those
on the Commodity Control lists under export control acts. Disturbing, is that the number of
Chinese companies authorized to engage in international trade has grown dramatically to
such a degree, the national government is finding it difficult to control imports and determine
who the end users of imported equipment are (Frieman, p.7).
The U.S. is not the only supplier of “dual-use” technology to China. The Chinese may
have a preference for U.S. technology, but Chinese importers tend to look to other sources
when delays in export controls are significantly shorter.
According to Frieman’s report, the
Chinese claim, and the U.S. tends to agree, that delays in processing license applications
result in lost sales for U.S. companies because the Chinese can acquire the same
equipment elsewhere (p.6). This claim is apparent in the steadily increasing number of
Chinese market research groups in Chinese import-export companies.
On the U.S. end, Frieman argues that it is difficult to assess whether the sales of
“dual-use” goods as defined by the Commodity Control list increased proportionately to
overall exports between the period 1984-1985 when export controls were loosened. It is
known however, that U.S. sales to China of equipment in selected “dual-use” categories
grew in 1985 by well over the 29 % increase in total exports.
“For example, sales of
computers and office equipment increased 95% to $173.2 million; industrial machinery sales
grew by 145% to $125 million and scientific equipment sales increased by 52% to $249.2
million” (Frieman, p. 9). Furthermore, the level of sophisticated imports by China grew in the
1980s in the area of computers and integrated circuits manufacturing. In hindsight to the
increased amount of sophisticated imports by China from the U.S. and other global
suppliers, more information is needed on the end user to assess any long or short-term
affects from the transfers on China’s economic/military capabilities.
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Without knowing the end user, export controls to China are warranted. It is difficult to
assess whether or not the products imported for civilian purpose will be used in the
production of military weapons or the improvement of such weapons. For instance lacking
in U.S. trade data is the know-how and inputs transferred to China for the production of
ceramics and metal matrices. According to Frieman’s report, China is dependent on steel
for most heavy manufacturing and has not quite mastered the production of advanced
metals used in advanced weapons and aircraft systems.
However, if the Chinese are
importing these items (i.e. ceramics and other metal matrices) with the intent of devoting the
goods to the military sector, the range of military application is quite broad. Data available
on the composition of Chinese imports does not appear to be directed at any one particular
branch of service of military mission, but can contribute in the long-term to the technological
infrastructure that is required for advanced weapons production.
It is apparent that the goal of China is to restructure its machine building industries in
a way that will increase the country’s capabilities of making both civilian and military
products in a number of factories to further integrate the country’s civilian and military
economies. This parallels the economic argument of market failure. The Chinese have
suggested that their country was burdened by endemic market failure due to the lack of
public investment in R&D (Feigenbaum, p.107). Weapons-only factories in China have only
recently begun to produce products for consumer and industrial customers. This makes it
possible to target the most efficient plants to convert directly to the sole production of
military hardware. This integration of civilian and military economies in China’s economy
makes it more difficult to identify the end user as the composition of China's imports become
more diverse.
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4.6 A Look at China’s Defense Infrastructure
The above section established the fact that it is difficult to determine which items sold
to China for civilian purposes will be used for military purpose without knowledge of the end
user. According to Frieman, whether or not the availability of “dual-use” goods to China’s
military infrastructure constitutes a risk to U.S. security can only be evaluated by examining
the sophistication of Chinese defense industries.
First, military industries differ from civilian ones in China in that they are under the
auspices of different government industries that are vertically integrated and completely selfreliant. For example, industries under China’s Ministry of Aviation Industry, process metal,
make machine tools, produce electronic components, and assemble aircraft engines and
aircraft. Each industry under the MAI is independent and shares little information between
one another (Frieman, p. 20).
Second, factories under government ministries are self-
contained, producing everything down to the foundry equipment (Frieman, p. 20). A third
difference between military and civilian factories is that military factories appear to have
been protected from some of the supply problems that plague consumer oriented industries
by way of a central government allocation system.
Material from local suppliers in China tends to be unreliable and the quality of the
materials cannot be guaranteed.
It is estimated that factories involved in weapons
production in China tend to receive between 85-95% of the required materials through the
central allocation system. As a result of this central allocation system, Chinese weapons
factories have been given priority for supplies and talented labor. On these grounds, the
central allocation system makes these factories more efficient than consumer ones.
However, vertical integration in the long run makes these industries not as cost-competitive
as consumer industries that are more diversified along supply lines.
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According to Frieman, evidence exists to support the notion that China’s
conventional weapons factories are considerably worse off than purely civilian industries.
The Chinese reluctantly agree with this notion and it has empowered the commercial
technology elites to shift the locus of weapons decision making much closer to the end user
and reassess the approach to innovation alone through the military sector (Feigenbuam,
p.99). In the past, “foreign visitors to Chinese conventional weapons factories have reported
that production techniques are antiquated, discipline is lax, and quality control is nonexistent” (Frieman, p. 23).
This is because military innovation from the Maoist period was
in the development driver’s seat and resulted in China missing out in sharing in the
technology revolution in Silicon Valley during the 1960s and 1970s (Feigenbaum, p.98).
As well, military industries in China have been extremely isolated from the outside
world, from each other and from the civilian economy. Until recently, political and budget
restrictions have kept many of the defense industries isolated from the rest of the
industrialized world, unlike their civilian counterparts which have been pursuing "open door”
policies aggressively with world markets since 1978 (Frieman, p.23).
Also, the healthy
subsidies provided by the Chinese government to its defense industries, has kept them from
developing an entrepreneurial spirit which results from direct exposure to market forces
(Frieman, p.24).
These subsidies and liberal access to capital markets have greatly
contributed to the country’s public debt problems today. As part of a larger solution it is no
wonder the Chinese government is encouraging horizontal integration.
Although it is possible to generalize about the management and organization of
China’s weapon’s factories, the sharpest contrast in the quality and capabilities of its
weapons is between its strategic and conventional weapons programs. To date, China is
still relying largely on foreign designs from the 1950s for its conventional weapons programs
and because of its antiquated infrastructure and vertical integration of military industries, the
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Chinese have found it difficult to move to production of a new generation of conventional
weapons systems (Frieman, p.32).
Today, the Chinese are still engaging in cash-for-
weapons transactions with Russia. In February 2000, the Chinese completed a cash-forweapons transaction in a $800 million dollar sale of two Russian built destroyers (Pomfret,
p. A17). Although the technology transferred is some fifteen to twenty years behind the
U.S., China’s strategic program has achieved significant results from its concentration of
talent and capital investment. This program gives pause to the country’s ability to assimilate
foreign technology with the infrastructure it already has.
4.7 China’s Ability to Assimilate Foreign Technology
Given the country’s achievements in its strategic weapons program with the
antiquated infrastructure its defense industry has, the question is whether or not a specific
technology transfer from the trade of a “dual-use” good will result in an improved weapons
system? The outcome of a success particularly depends on the factory and talent involved,
and generalization about this is difficult when the record of the country’s civilian/military
economic integration program is still being played out.
It is known though, that China’s has a considerable historic record in the exploitation
of foreign technology. For instance, China’s entire industrial structure for military production
was established in close consultation with Soviet experts in the 1950s and closely modeled
on the Soviet’s centralized administrative system (Frieman, p.32). The influence of Soviet
design and technology can be considerably seen in Chinese weapons systems today. “In
1984, a study concluded that all of Chinese conventional weapons fit into one of five
categories: Chinese designed weapons which incorporate features of foreign systems,
reverse-engineered systems, modifications of Chinese or foreign prototypes, weapons
licensed to the USSR, and foreign captured systems still in use (Frieman, p.34). Chinese
fighter aircraft submarines, tanks, and armored personnel carriers rely heavily on foreign
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prototypes. In 1969, PLA ground forces captured a Soviet T-62 medium tank that became
the model for the Chinese T-69 (Frieman, p. 34).
Although the Chinese have been reliant on foreign technology and successful in
assimilating it, the cost has been significantly high.
According to Frieman, reverse-
engineering processes took years before serial production could begin, and when
production did begin it did not enable the Chinese to take advantage of current technological
advances to produce a new generation of weapons systems. While the rest of the world
moves ahead the Chinese have continued to use weapons designs that are 15-20 years old.
From this a generalization based on Li’s argument mentioned earlier in this paper
could be made. Because of management and vertical integration of defense industries in
China, the country’s ability to assimilate foreign technology has not contributed to its overall
technical-production efficiency.
However, if defense industries in China become more
horizontally integrated into the civilian economy, technological assimilation may have a
chance to improve the country’s overall technical production efficiency.
Although this
generalization is hard to make, the historical record does contrast with Krugman’s argument
that less developed countries take advantage of products existent in the market by
producing new products and not old ones.
Three major factors will determine the chances for success of any technology
transfer: the ability to select appropriate technology compatible with current infrastructure,
the availability of complimentary inputs, and the assignment of quality personnel to the
project (Frieman, p. 37). Although China’s portfolio of imports has become more composed
of sophisticated equipment, it is quite doubtful its centralized planning system is capable of
using these imports to meet the above requirements. China has an import plan, but no
absorption plan for the technology. The scientific and technical development plans are
divorced from the import plans and the economic development programs of the country
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(Frieman, p. 37). Also with the decline of Russian power in the post-Cold War era, China is
without a coherent military strategy
and will make it impossible for its centralized
administrative system to rank objectives and translate them into specific weapons systems
(Frieman, p. 43).
Thus it is reasonable to suspect more attention will be focused on the country’s
strategic weapons program and conventional defensive capabilities Given the country’s
public debt problem, economic efficiency will be compromised as foreign exchange earnings
from exports and capital investments are diverted to military programs. Technical productive
efficiency will decline in hindsight of a military modernization program. As a result U.S.
economic preponderance is not at risk in the near future.
Yet, military modernization does propose a concern to regional interests and U.S.
interests. In assessing the affect of selling “dual-use” high technology items to China for its
military modernization program, the policy-maker must consider two technical issues: (1) In
principle, how might the availability of a “dual-use” item help the Chinese improve military
capability? And, (2) In practice, what technical obstacles are the Chinese likely to encounter
in attempting these improvements?
Until the integration of China’s civilian and military
economies plays out, it will be difficult to assess the impact of a technology transfer on the
country’s military capabilities. The success of the country’s strategic program, which is far
ahead of its conventional program, should give pause. Thus it is imperative in US interest to
assign high priority than it has in the past to the analysis of evolving Chinese capability in
key “dual-use” and military industries. “This will indicate when the Chinese are about to
make the transition from needing ‘everything’ to just needing one or two items that will make
a difference, and will help protect the U.S. from future technological surprises” (Frieman,
p.59).
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4.8 China and Hughes Electronics Corporation
The aftermath of Hughes Electronics Corporation's transfer of commercial satellite
technology and design information to the Chinese has generated great awareness of the
risks to U.S. national security in the trade of “dual-use” technology. The case presented a
diversity of problems in current U.S. export control policy and licensing arrangements with
foreign nationals. China’s greatest strength is its strategic weapons programs.
Defense experts that the aftermath of Hughes negligence in providing technical and
deign information through their licensing arrangement has the potential to improve China’s
payload capabilities with its medium to long-range rockets. Important to take from this case
is that with the integration of China’s civilian and defense industries and without knowing the
end user of an imported item into the country, the risks from “dual-use” transfers is greatly
increased. Without this information, the impact of a technology transfer may not be known
for years and may leave the U.S. in for a technological surprise. In 1999, a report titled, The
Cox Report, presented its findings from an investigation of the transaction and other risks
that have arisen from commercial transactions with China.
In 1992 and 1995, Hughes Space and Communications International, Inc. attempted
to launch two communications satellites from China on Long March rockets, which exploded
before reaching orbit. Hughes investigated the causes of both of these failed launches and
determined that the rocket's fairings were the cause of the failures. This information was
shared with China Great Wall Industry Corporation, a Chinese government entity in
Xiachang. Allegations then arose regarding technology transfer in connection with failure
analysis investigation conducted by Hughes and presented by the company to CGWC.
“In the course of the investigation, Hughes communicated technical information
regarding the rocket to the PRC that assisted the PRC in improving the Long March 2E
rocket. The activities of Hughes employees in connection with the investigation of the failed
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launch in 1992 resulted in the transmission to the PRC of technical information that appears
to have been approved by a U.S. Government representative but not properly licensed” (The
Cox Report, chap. 5).
In Hughes’s failure analysis, the technical information that was
shared with CGWIC and approved by an U.S. government representative should not have
been authorized for export to the China.
In both failure analyses of the 1992 and 1995 launches, Hughes shared information
on the Long March 2E fairings that protect the rocket's payload. The information shared
was beyond the scope of the original license issued to Hughes by the Department of
Commerce.
It was found that to export such technical information came under the
authorization of the U.S. State Department. In both failure analyses, Hughes claims that
prior approval was given by U.S. officials to share technical information on the fairings to the
Chinese. However, neither Hughes nor the pertinent U.S. government officials involved
could provide records that could substantiate the claim fully (The Cox Report, chap. 5).
The lessons learned by China from Hughes on the failure of the fairings on both
Long March rockets used in 1992 and 1995 were directly applicable to fairings on other
rockets used to launch Chinese military satellites and payloads carrying strategic weapons.
The Cox Report stated that the information learned by the Chinese on the failure of the
fairings was possibly transferred to the country’s ballistic missile program. It was the opinion
of the report that fairing improvements learned in the failure investigations could be of
benefit to multiple independently-targeted reentry vehicle (MIRV) development (chap. 5). It
was agreed on that the failures of licensing arrangements between U.S. officials and
Hughes has given China the engineering and know-how to conduct future failure analysis
tests on rocket launches to build better fairings that can be used in the country’s ballistic
missile programs.
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To go into a detailed overview of the licensing arrangements between U.S. officials
and Hughes would be of benefit for a future paper, but is not needed here.
The
investigation by the Select Committee showed that both sides could not provided pertinent
records to support claims of approval and disapproval in the licensing process. What is
known is that the current operation to obtain U.S. licenses to export certain goods, services,
and knowledge has a significant amount of overlap between the Department of Commerce,
Defense, and State Department. The failure is that this overlap does not properly contain
the sharing of information between parties in an arrangement beyond the selling of a good
or service. What is important here is that this paper has provided an argument that U.S.
export controls have been loosened in attempts to recoup lost sales by U.S. firms engaged
in the production of high-technology goods.
As a result, in the trade of “dual-use” technology the risk of a trading partner
acquiring information or a byproduct of a technology input is a risk to U.S. security when it is
used in the modernization of that trading partners weapons program.
In the
Hughes/Chinese transaction what the Chinese gained was improvement in fairing designs
that could be used to improve the payload protection in the country’s ballistic missile and
military satellite program. As well, the Chinese also gained know-how in the conduction of
anomaly analysis to target failures and assist in the improvement of rocket launches. Such
a knowledge transfer may if not already has been diverted to the country’s MIRV
development program. The threat to regional and U.S. interests is more reliability in the
payload systems in China’s ballistic missiles, as well as the potential to increase missile
accuracy from improved anomaly tests.
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CONCLUSION: Containing Tech Transfers with out Compromising Economic
Security
U.S. and other nation-states are paying the price in compromised security today due
to pressures from globalization. The race for market share in China is one such example.
In today’s news we are hearing about Chinese espionage in U.S. nuclear and related
defense industries. The success of this espionage has been the use of “dummy” or “front”
firms by China for the purchase of technological inputs such as super computers and
oscillators critical in nuclear weapons development programs.
On May 25, 1999, CNN
reported that the compromise in U.S. export controls has give China the economic and
military capability to produce within three to four years intercontinental nuclear warheads
that could accurately reach the continental U.S.
Evident from this is a need to overhaul the current export control system. Today’s
system is under the auspices of the Department of Commerce, whose interest is to promote
U.S. exports and U.S. business abroad. The goals of the DOC automatically create an
imbalance between economics and security. Prior to the DOC’s control of the export control
system, the system was in the hands of the Department State. After the Cold War, the
reigns of control were handed over.
The international environment at the time was an emerging European Union, the
technological preponderance in the new industrial economies of Southeast Asia, and the
economic collapse of the Soviet Union. With these factors and others, the U.S. changed
from a Cold War regulator to a “competitive” nation-state. Controls on “dual-use” goods
(which at the time had no present military applications) were loosened, and transnational
firms took advantage of these loopholes to export these products in order to “shore” any loss
in technological leadership. Along with this, the rise of trading blocs eroded previous control
systems giving transnationals the ability to divert international transactions in “dual-use”
goods unchecked across multiple borders in customs unions. Beyond transactions are the
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sharing of know-how between firms and their host economies. How to overhaul the current
export control system can be a whole new paper in itself. Critical to the overhaul is the
enforcement required to monitor the behavior of transnational corporations. The dilemma is
between unilateral and multilateral action that would not have economic costs of export
controls rise above those of economic security. It is a fact that the behavior of transnational
firms in international trade is just as difficult as monitoring the transactions in intra-firm trade
of “gray” area goods.
What needs more careful scrutiny is licensing, acquisitions by foreign firms, and joint
ventures between firms. It is in this arena that a greater degree of technology diffusion
takes place. It is possible, but alone only idealistic, that a strong WTO formulate codes that
nations must abide by when transferring “dual-use” goods to help create collective economic
security. This may be much preferred by nation-states in which safeguarding autonomy is
paramount, rather than entering arrangements with other countries in which free trade
maybe compromised. Under these arrangements countries would have more control over
market access and direct investment that would impede free trade and the operations of
transnationals.
The nation-state today is at a crossroad. The dilemma is when to interfere in the
behavior of transnationals as well as managing trade more without creating friction in
today’s free trade environment. In the past the nation-state was the acting sovereign and
controlled the flow of goods over its territories.
Today trading blocs of countries have
eroded this sovereignty, so this may be where the nation-state can begin. Export control
systems within trading blocs such as the EU, NAFTA, and ASEAN may be more affective
rather than one contrived by the WTO. Territory is still safeguarded and the trading bloc can
be the acting “container” allowing nation-states to continue to act “competitive”.
— 68—
Could this help strike a balance between economics and security. It all depends and
we will have to wait and see. The obvious challenge first is to act unilaterally to overhaul the
current export control system and list of “dual-use” goods that have alternative uses before
the state can act multilaterally.
The members of the European Union are facing this
challenge now as it seeks to broaden the Union to bring in the nation-states of Eastern
Europe.
The months ahead will tell us how the U.S. will respond officially to China’s alleged
espionage activities in U.S. industries.
The actions taken by the U.S. will have
repercussions on the free trade environment as well as it trading partners. The sensitive
issue is of course how the major players, transnational firms will respond. The retrenchment
of the nation-state may increase hostilities with the transnational firm, which has the luxury
to relocate to economies, like China.
What should be decided is whether or not China really matters economically. A
policy that engages China as a second-rate power economically would have an impact on
the thinking of transnationals seeking to do business there. Whatever the spin, the argument
has been debated to death that one can not miss out on China’s market. The numbers say
otherwise though. In 1997, China contributed less than 3.5 percent to world GNP (Segal,
p.25). As well, China’s GNP for the same year ranked seventh in world behind Brazil and
Italy. More depressing is that its per capita GNP ranking was 81st, ahead of Georgia and
Papua New Guinea (p.25).
By conservative estimates, the country’s loans are non-
performing and its banking system is losing money. In terms of international trade and
investment, the story if much the same. In 1997 and 1998, China contributed a mere 3% to
total world trade which is less than the Netherlands. By taking these few qualifications into
account, China’s economy is in a recession. It doesn’t take a statistical genius to see that
China is a minor player, with a contracting economy that transnational should think twice of
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“getting in bed with”. Even Ericsson, a Swedish telecommunications company, says it has
yet to make any profits in China yet (p.28).
A U.S. policy that treats China as a second rate power economically, politically, and
militarily, would do good in influencing the balance-of-power between nation-states and
transnational more in favor of the nation-state. Until the illusion of China is “cut down to
size”, tougher regulation and monitoring of transnational’s behavior in trade and technology
transfers need to be done.
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